Surprise Loss at Wachovia Stirs Profit-Season Unease

By ERIC DASH

Published: April 15, 2008

The Wachovia Corporation kicked off what is expected to be a grim earnings season for the nation's banks on Monday, stunning Wall Street with an unexpected loss.

The red ink at Wachovia, the country's fourth-largest bank, signals that the pain for the financial industry is far from over. Giants like Citigroup and Bank of America, as well as dozens of smaller banks, are expected to report weak results in the coming days and weeks.

Wachovia's disclosure added to the growing sense of unease on Wall Street over softening earnings at many major corporations. General Electric, considered a bellwether for the global economy because of its diverse operations, shocked investors on Friday by falling short of analysts' profit forecasts. More companies are likely to disappoint investors as the economic downturn takes hold.

''During recessions, profits fall,'' said David Kostin, the United States investment strategist for Goldman Sachs. ''That is not in most people's forecasts.'' Wachovia's first-quarter performance was particularly bleak, with the company swinging to a loss of $350 million.

In an interview, G. Kennedy Thompson, the chairman and chief executive of Wachovia, said the economy had slipped into a mild recession and he provided a sober outlook for the banking industry, saying the crisis gripping the housing market was only half over.

''We are in the early stages of the credit cycle,'' Mr. Thompson said. ''Its severity will play out according to the health of the economy.''

A growing number of homeowners with mortgages from Wachovia walked away from their homes when they fell behind on their payments. Charge-offs nearly doubled, to 0.66 percent of net loans. Wachovia's capital levels, meanwhile, have been depleted by the mounting losses from its ill-timed acquisition of Golden West Financial, a large California lender, near the peak of the housing boom. Lenders of all sizes face similar problems, and for some the situation is dire. On Monday, the Fremont General Corporation, a troubled mortgage lender, agreed to sell its retail banking assets for $198 million.

JPMorgan Chase, which reports earnings on Wednesday, has been one of the few banks to successfully weather the credit storm so far. But investors are bracing for weaker results, given the market turbulence in March and big home equity losses.

Citigroup, which will release its earnings on Friday, is likely to announce another huge write-off on top of the $22 billion in charges it announced last year. Analysts project the bank could take as much as a $12 billion charge as Vikram S. Pandit, its new chief executive, tries to clean up Citigroup's big portfolios of home and credit card loans and whittle down a mountain of complex mortgage-related investments.

Bank of America, Merrill Lynch, Wells Fargo and dozens of smaller banks are likely to face similar troubles when they report first-quarter results in the coming weeks.

''The pressure is a little more pronounced,'' said Kevin Fitzsimmons, a banking analyst at Sandler O'Neil. ''But it is an indication that the deterioration is not abating, but accelerating.''

Banks are paying the price for the easy money they extended to fuel the housing boom. Under pressure to cut costs, the banking industry is expected to shed 150,000 to 200,000 jobs in the next 12 to 18 months, according to a new Oliver Wyman report.

Banks are also scrambling to raise cash. On Monday, Wachovia announced plans to raise about $7 billion, with the potential for another $500 million, through the issuance of common and preferred stock .The common stock is being offered at $24, a 14 percent discount to last week's closing share price.

Wachovia followed Citigroup, Merrill Lynch, UBS and Washington Mutual in turning to outside investors to shore up its balance sheets. And industry experts say that list is likely to grow. In fact, the 25 largest banks could raise more than $40 billion in new capital by the end of the year, according to one senior investment banker.

''There is not a C.E.O. worth his salt who is not thinking about capital management,'' this banker said. ''There are literally dozens of small and medium-sized institutions actively considering private capital raises, public capital raises, and other things.''

PHOTO: G. Kennedy Thompson, the chief executive of Wachovia, speaking to employees in February. The bank moved to shore up its balance sheet with a plan to raise capital.(PHOTOGRAPH BY CHUCK BURTON/ASSOCIATED PRESS)(pg. C6)